Raise Cash on Crowdfunding Sites

By

Sarah E. Needleman

November 27, 2011

After getting laid off from an architecture firm in 2009, Margot Broom tapped her savings to open a yoga studio in New Haven, Conn., called Breathing Room.

But when she was forced to relocate the business two years later, Ms. Broom couldn't afford to renovate the new space she had in mind—until she discovered crowdfunding, the practice of securing small amounts of money from multiple contributors online.

Using a crowdfunding service known as Peerbackers.com, Ms. Broom raised $10,000 from more than 100 contributors in just 45 days—with average contributions of $15 to $50. The 27-year-old is now using the money to turn an empty tattoo parlor into her business's new home.

ENLARGE

Ryan Snook

Need start-up capital—and fast? You may want to try crowdfunding, a money-raising strategy that's become increasingly popular in recent years.

A number of web services, including Peerbackers, IndieGoGo.com, Kickstarter.com and RocketHub.com, provide platforms for entrepreneurs to get funding from various contributors, often friends, relatives and members of their community. The funds don't need to be paid back because they're not loans. However, many entrepreneurs give their contributors some of the products or services their start-ups sell as a way to show appreciation.

To be sure, crowdfunding initiatives take effort and don't always pay off. Entrepreneurs need to convey why they're seeking financial support and hope contributions will come in during the timeframe allotted, which varies from service to service. Also, the crowdfunding sites typically take a small percentage of the funds that entrepreneurs raise.

In most cases, crowdfunding services require entrepreneurs to set a goal for contributions and will hold the pledges that come in until that goal is met. If the campaign falls short at the end date, some crowdfunding sites will return the funds to the donors or take a larger cut than if the entrepreneur's goal had been met.

"You need to work hard because not all campaigns are guaranteed success," says Slava Rubin, chief executive officer of IndieGoGo.com. The San Francisco-based crowdfunding service releases funds regardless of whether a user's goal is met, but the service takes 9% of the total from campaigns that come up short, compared with 4% for those that don't.

Mr. Rubin's advice for a fruitful crowdfunding effort: "Have a good pitch, be proactive and find an audience that cares."

Ian Gaffney and Samantha Abrams launched a campaign on IndieGoGo.com earlier this year for their start-up, Emmy's Organics, a maker of allergy-free snack foods in Ithaca, N.Y. They asked for $15,000 so they could buy packaging materials that would allow them to ramp up production.

"We got to a point where we weren't able to keep up with orders," says Mr. Gaffney, 28.

Mr. Gaffney says he learned about crowdfunding from his musician brother who, along with several bandmates, had used the strategy to raise funds to cover the cost of recording an album. To bolster their plea for financial contributions, Mr. Gaffney says he and Ms. Abrams created a video and posted it to their campaign page on IndieGoGo.

"We just talked about who we are and everything that we do and why we were doing this fund-raiser," he says.

By the conclusion of the 30-day campaign, the entrepreneurs had surpassed their goal by $326. The average contribution was $100, though one person, who requested anonymity, pledged $5,000. "We were shocked by what some people were giving," says Mr. Gaffney.

Among the contributors were some of his former colleagues from a marketing company that had laid him off in December 2008. The termination was what prompted him to start Emmy's Organics with Ms. Abrams the following month, he says.

Mr. Gaffney says they thanked contributors by giving the group about $1,000 worth of products. The more money people pledged, the more free goodies they received.

Though the initiative went smoothly, the entrepreneurs don't plan to participate in crowdfunding again—at least not anytime soon—because they say it would send the wrong message to their supporters. "If we asked for more money, that would be far-fetched," says Mr. Gaffney. "We don't think people would donate twice."

In addition to being able to raise money via crowdfunding only so many times, entrepreneurs say another caveat is that some people find the tactic offensive. Others say would-be contributors aren't always comfortable sending money through crowdfunding services.

Ms. Broom, the yoga entrepreneur, encountered the latter problem. "Some people were worried they'd get put on a mailing list," she says.

But a few offered a simple solution without her even having to ask. "They said they would rather send me a check," says Ms. Broom. "And some did."

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